Carbon calling: Why insurance is ready to answer

At a time when the largest economy in the world is swinging its support behind high-quality voluntary carbon projects , the insurance sector stands at a pivotal juncture. As the US government’s backing shows, voluntary carbon projects have significant potential in reducing carbon emissions and reversing environmental damage. And yet high-profile disruptions such as the Rimba Raya Biodiversity Reserve Project demonstrate only too well how these markets can be fraught with risk.

This is the insurance sector’s carbon calling; to help tackle this risk with products that encourage participation in high-quality projects. Embracing this call is about more than corporate responsibility. By de-risking projects, insurance can help drive significant private capital into the fight against climate change, leading a transformative wave for change.

The insurance sector’s role in the climate transition

With far-reaching influence and significant financial clout, insurance is uniquely positioned to make a real, positive difference in this space. From insuring renewable energy projects to covering sustainable agriculture practices, the sector’s involvement not only helps to stabilize and secure climate transition processes but also sends a strong signal to the market about the viability and importance of sustainable practices—in support of the US government’s rallying call. This proactive stance in climate risk management can catalyze broader changes across industries, making the insurance sector a key player in shaping a more sustainable future.

De-risking climate solutions?: A new frontier for insurance

For the insurance sector, the venture into de-risking climate solutions marks a new frontier. By developing innovative products, we can address specific risks associated with the climate transition, particularly in voluntary carbon markets which are suffering from delivery risk—the risk that carbon credits will not be delivered as agreed. This can be driven by several factors including natural disasters such as wildfires and flooding, fraud and the risk of political intervention, as the Rimba Raya Biodiversity Reserve Project shows.

One of the most prominent nature-based projects in voluntary carbon markets, Rimba Raya experienced challenges when Indonesia issued an export ban on carbon credits back in 2022. Since then the project has encountered licensing issues, throwing the delivery of credits into doubt and highlighting long-standing concerns around voluntary carbon markets in terms of regulatory risks and project transparency. Considering these headlines, it’s no surprise that 75% of respondents to a recent CFC survey stated they are ‘very concerned’ about delivery shortfall, with 65% revealing they are current buyers who have experienced shortfalls firsthand.

But it doesn’t have to be this way. The insurance industry is developing products to mitigate this risk, while significantly boosting market confidence and stability—one example being covering the non-delivery of carbon credits in forward-purchase agreements. For instances like Rimba Raya, entities who had forward-purchased credits with insurance in place would have received cover for financial losses associated with the non-delivery, safeguarding their investment and encouraging future participation in the market.

Pioneering moves in the insurance sector

Leading the way in innovative climate-focused insurance solutions, CFC’s development of carbon default insurance specifically addresses the delivery risk associated with forward purchasing voluntary carbon credits. Some 85% of respondents to the CFC survey reported they are ‘very likely’ to consider buying under-delivery insurance, showcasing the sector’s potential in creating these types of solutions.

Beyond CFC, other insurance companies are also stepping up with products that cover a range of climate-related risks. From insuring renewable energy projects against operational risks to covering green buildings and sustainable agriculture, the sector is showing great commitment to securing a sustainable future for us all.

Of course, the path ahead isn’t without challenges. There’s complexity to address when assessing and pricing climate-related risks, which often involve long-term, uncertain factors. Then there’s the challenge of balancing traditional risk management with the need to support innovative yet sometimes untested climate solutions. Overcoming these challenges will require investment into research and collaboration with environmental experts and scientists, to produce better risk modeling and more accurate pricing for climate-related insurance products. By fostering partnerships with governments and international bodies, insurance can also help in creating supportive regulatory frameworks and incentives for developing climate-focused insurance products.

Rallying call: Gathering to build a better future

As the world grapples with the escalating impacts of climate change, the insurance sector’s engagement in de-risking climate solutions is not just an opportunity but a necessity. Few industries are better placed to help drive the climate transition, be it bolstering voluntary carbon markets or ensuring the viability of renewable energy projects. The fact that 50% of non-buyers responding to the CFC survey stated they would be more inclined to purchase carbon credits if they could be insured is a huge call to action for the sector.

It's time to seize the carbon opportunity with both hands, to innovate, collaborate and lead. Only then can the sector secure its relevance in a rapidly changing world and contribute significantly to a more sustainable, resilient planet.

If you’re interested in this space, I recommend taking a look at the full results of the CFC survey in our new carbon insurance report .

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